Quality, contracting, and competition in developing country supply chains
Focus of the study
Low product quality – or inability to credibly signal high quality – may be a hindrance to firm growth and exporting in developing countries. In this project, we study how incentives for quality upgrading are passed along supply chains, and how firms’ ability to measure and contract over quality interacts with the regulatory environment and public services.
In partnership with a World Bank-funded capacity building program at the National Quality Infrastructure agencies in Ethiopia, we conduct an RCT that adjusts the costs of product quality testing at several points along the supply chain for honey. We investigate how reductions in the costs of quality verification at multiple points interact with one another and with the structure and degree of competition along the chain. The results are important for understanding how public services influence firm-to-firm contracting and how the structure of supply chains affect developing countries’ comparative advantage in international markets.
Broader motivation for the research
Moving up the “quality ladder” is a common policy goal in developing countries, allowing firms to access rich country markets and move into higher value-added production. However, firms are often unable to meet the required product standards, resulting in rejections of goods at ports of entry and sometimes in blanket bans on whole categories of imports. Consumers within developing countries also suffer from the unavailability of (or difficulty in identifying) high quality goods.
We study how incentives for quality upgrading are passed along a supply chain within a developing country. Quality depends not only on the choices of the end firm in the chain, but also its ability to source inputs from upstream. In the absence of traceability systems and strong contract enforcement, quality screening at the end of a long supply chain may be insufficient; instead, parties at each point in the chain may require the ability to screen for quality at their respective point of sale. We therefore cross-randomize the introduction of testing technologies at links downstream and upstream, in order to study how quality- contracting constraints at various points along the value chain interact.
The results of this research are relevant not only for governments considering investments in quality-related regulations or services, but also have broader applicability for value chain approaches to promoting industrial development and exporting.
- Lauren Falcao Bergquist, University of Michigan
- Meredith Startz, Stanford University